Freeport Deal Talk Intensifies on Cheap Copper: Real M&A
Freeport-McMoRan Copper & Gold Inc. (FCX) is offering the best deal in copper for mining companies willing to bet big on the metal.
Freeport, the world’s largest publicly traded copper miner, yesterday was valued at 3.3 times its earnings before interest, taxes, depreciation and amortization in 2013, according to analysts’ estimates compiled by Bloomberg. That was cheaper than any other base metals producer with more than $10 billion in market value and about a third less than the median.
While Freeport faces the first back-to-back slump in annual earnings after workers at its Indonesian mine went on a three- month strike and copper prices fell from a record on concern over a slowdown in China, analysts say its Ebitda next year will rebound to an all-time high as demand recovers. Freeport could now attract Rio Tinto Group (RIO), its partner in Indonesia, according to Adrian Day Asset Management. A deal would also give BHP Billiton Ltd. or Anglo American Plc (AAL) a company that produces 10 percent of the world’s copper, Oracle Investment Research said.
“Freeport has probably the most attractive assets in the world with its copper mine in Indonesia,” Jean-Francois Comte, co-founder of Lutetia Capital, a Paris-based hedge fund that bets on mergers and acquisitions, said in a telephone interview. “Anybody who believes that would probably look at it.”
Eric Kinneberg, a spokesman for Freeport, declined to comment on whether it would consider a sale or has been approached about an acquisition. The Phoenix-based company had a market capitalization of $35 billion yesterday.
Shares of Freeport climbed 2.3 percent to $37.76 in New York today, the sixth-biggest gain in the Standard & Poor’s 500 Materials Index.
Freeport-McMoRan, which traces its roots to the Freeport Sulfur Co. founded in 1912, operates on four continents from South America to Africa and has copper mines in the Democratic Republic of Congo, Peru and Indonesia.
Last year, the company produced about 1.67 million metric tons of copper, more than any other publicly traded mining company and about three times the amount that Rio Tinto yielded, according to the latest available data compiled by Bloomberg.
Since approaching an all-time high in January 2011, shares of Freeport fell 39 percent through yesterday, wiping out more than $20 billion from its value. About half the drop came since February, when violence flared among employees following the strike at Freeport’s Grasberg mine in Indonesia and concern increased that slowing economic growth in China will sap demand for copper.
Shipments from the mine, which has the world’s largest recoverable reserves of copper, were interrupted after employees stopped working to demand higher wages on Sept. 15. The stoppages caused Freeport to cut its first-quarter forecast for copper production from the site last month.
China, which uses about 40 percent of the world’s copper, expanded 8.1 percent in the first quarter, the slowest pace in almost three years.
After Freeport’s Ebitda fell 0.3 percent in 2011, analysts anticipate its earnings will decrease 13 percent to $8.9 billion this year for the first consecutive annual decline since at least 1986, according to data compiled by Bloomberg.
Including net debt, Freeport was valued at $36.6 billion yesterday, or 3.3 times its projected Ebitda of $11 billion next year, analysts’ estimates compiled by Bloomberg show. Jiangxi Copper Co., Freeport’s closest publicly traded competitor by output, commanded more than twice as much, the data show.
Freeport also sold for about $652 per metric ton of its copper equivalent reserves, according to data compiled by Andrew Cosgrove and Kenneth Hoffman, metals and mining analysts for Bloomberg Industries in Skillman, New Jersey.
The multiple, based on the median of analysts’ estimates for copper prices in 2015, was about half the average of $1,232 a metric ton for similar-sized companies primarily focused on copper mining, the data show.
Freeport, which acquired rival Phelps Dodge Corp. in 2007, is boosting production after the global economic recession halted its expansion.
The company plans to expand mills in the U.S., Peru and the Congo to increase output almost 1 billion pounds (454,000 metric tons) by 2016, Chief Financial Officer Kathleen Quirk said in a Feb. 27 presentation. That would represent an increase of more than 25 percent from its output last year and almost equal Rio Tinto’s production in 2011.
“It’s very difficult for mining companies to build out” brand-new copper sites, Michael Gambardella, a New York-based analyst at JPMorgan Chase & Co., said in a telephone interview. “If someone wants to start up a new copper mine in the world it usually takes about seven or eight years.”
The price of copper may climb to $9,500 per metric ton, or within 10 percent of its all-time high, over the next 12 months as the global market remains in deficit for a third straight year and Chinese demand picks up, according to Stefan Graber, an analyst at Credit Suisse Group AG, who in July correctly forecast gold would reach a record $1,600 an ounce.
Copper sold for $7,984.50 a metric ton yesterday.
Rio Tinto, the world’s third-largest mining company, could seek to buy Freeport and more than quadruple its own production of the metal, according to Adrian Day, who oversees about $170 million as president of Adrian Day Asset in Annapolis, Maryland.
The London-based company helped expand Freeport’s Grasberg mine in 1995, which entitled it to a 40 percent share of production at the Indonesian site above specific levels until 2021 and 40 percent of production after that, according to its annual report released last month.
Rio Tinto, BHP
Rio Tinto produced 520,000 metric tons of copper last year, accounting for about 11 percent of the company’s $60.5 billion in revenue, data compiled by Bloomberg show.
BHP (BHP), the world’s largest mining company, can more than double copper output with Freeport, according to the latest available data compiled by Bloomberg. Copper and other base metals made up 20 percent of BHP’s about $72 billion in revenue last year, the data show.
Freeport would also help Anglo American restore some of the copper it lost after selling a 24.5 percent stake in Anglo American Sur SA, which includes the Los Bronces copper mine in Chile, to Mitsubishi Corp. in November. Codelco, Chile’s state- owned producer, is seeking to exercise an option from 1978 to buy 49 percent of Anglo American Sur and says the stake sale was an attempt to block its option.
“There’s absolutely no question that this has to be attractive to a larger buyer,” Laurence Balter, who manages the Oracle Mutual Fund (ORGAX) for Fox Island, Washington-based Oracle Investment Research, said in a telephone interview. The firm oversees $100 million, including Freeport stock. Freeport is a “diamond in the rough,” he said.
Ruban Yogarajah, a spokesman for Melbourne-based BHP, Rio Tinto’s Illtud Harri and James Wyatt-Tilby, a spokesman for London-based Anglo American, all declined to comment on whether their companies are interested in buying Freeport.
Buying Freeport could cost over $45 billion, based on a 30 percent premium, Adrian Day Asset estimated. That would be almost twice as much as the biggest ever takeover in the copper mining industry -- Freeport’s own purchase of Phelps Dodge for $23 billion five years ago, data compiled by Bloomberg show.
“It’s possible that this could happen over time, but you’re looking at a very large transaction and not a lot of potential folks that have the deep pockets to do that,” Chen said in a telephone interview.
Chen also said Freeport’s Indonesian assets have risks that could concern some potential buyers, citing the recent violence at its Grasberg mine that prompted it to halt production.
The company said in January that two workers were shot dead near the site. A total of 15 people have been killed and 56 injured in the shootings since July 2009 at Grasberg and along the road leading to Freeport’s mining and milling operations in the district, the company said in February.
The victims included Freeport employees, contractors, members of law enforcement and civilians, it said.
“If you look at where copper is mined in the world, it’s not always in the most stable of regions,” Chen said.
Foreign companies holding mining licenses in Indonesia will also have to cut their stakes to 49 percent within 10 years of starting production, from 80 percent, according to a decree signed by President Susilo Bambang Yudhoyono on Feb. 21.
Indonesia may ask foreign investors that are majority owners of mining companies to sell shares to the government to comply with the law.
Day of Adrian Day Asset says the prospect of owning Freeport may still be worth the risk for potential buyers such as Rio Tinto, BHP and Anglo American.
“This would be the way of picking up 10 percent of the world’s copper production in one fell swoop, including some of the world’s major copper mines,” he said. “If someone were to buy Freeport they’d get a jewel at a great price.”